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Executives

Raymond Zinn, President, Chief Executive Officer

Ray Wallin, CFO and VP of Finance

Andrew Cowell, VP Analog Marketing

Christopher Dingley, VP Worldwide Sales

Analysts

Bowman Torry - Stifel Nicolaus

Doug Freedman - Gleacher & Company

Sumith Danda - Bank of America/Merrill Lynch

Christopher Longiaru - Sidoti & Company

Micrel, Incorporated (MCRL) Q2 2010 Earnings Call July 22, 2010 4:30 PM ET

Operator

Good afternoon ladies and gentlemen, thank you for standing by. Welcome to the Micrel Incorporated 2010 Second Quarter Results Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator instructions). This conference is being recorded today, Thursday, July 22, 2010.

I would now like to turn the conference over to Mr. Ray Zinn, President and Chief Executive Officer of Micrel. Please go ahead, sir.

Ray Zinn

Well thank you, Damien. Welcome to our Q2, 2010 conference call. With me today is Ray Wallin, our Vice President of Finance and Chief Financial Officer, as well as Chris Dingley, who is our Vice President of Worldwide Sales and Andy Cowell, who is our Vice President for Analog Marketing Group.

So with that I'd like to turn the time over to Ray Wallin to give you the prepared remarks'. Ray, go ahead please.

Ray Wallin

Thanks a lot Ray. In conjunction with this conference call, a number of supplemental charts will be made available on Micrel's website during the following prepared remarks. To access these charts, go to www.micrel.com and click on the link to the second quarter 2010 conference call slides.

We will begin today's call with the legal disclaimers and Safe Harbor statement. All material contained in the webcast is the sole property and copyright of Micrel Incorporated with all rights reserved. Certain statements in this conference call, which are not historical facts, may be considered forward-looking statements that involve risks and uncertainties. Forward-looking statements include statements regarding future business results, future levels of sales and profitability, future customer demand and economic and industry projections. Various factors could cause actual results to differ materially from what is set forth in such forward-looking statements. Some of the factors that could affect the company's results have been set forth in our press release dated July 22, 2010 and are also described in detail in the company's SEC filings, including but not limited to our Annual Report on Form 10-K for the year ended December 31, 2009.

Listeners who do not have a copy of the second quarter earnings press release may view the press release on the company's website at www.micrel.com. We will review the financial results for the second quarter ending June 30, 2010 and then discuss our outlook for the third quarter of 2010. Our prepared remarks will then be followed by a question-and-answer session with the financial community.

Let's begin with Micrel second quarter financial and operational highlights. Second quarter revenues increased by 10% on a sequential quarter basis but fell slightly short of our expected sequential quarter growth range of 12% to 15%. A major reasons for this short fall was supply chain delinquencies at right from of our scheduled product shipments in the quarter. However, we currently expect these supply chain issues will be resolved during the third quarter and will not impact our results in the second half of 2010.

Despite a short-term challenge, our second quarter results was solid and we are pleased with our operational execution. Finance from customer serving the communication, computer and industrial end-markets was strong, resulting in a book-to-bill ratio well above one along with a robust ending backlog. In addition, our second quarter gross margin was better than expected, an increase on sequential quarter basis for the fifth quarter in a row.

Overall, we believe we are doing good job controlling operating expenses while managing the significant growth we have achieved during the past several quarters. As the result, our second quarter operating margin expanded to 25.8%.

In addition, our share focus on working capital management continues to result an improvement in many of the key balance sheet metrics. During the second quarter, cash and short-term investments increased by nearly 21 millions to a balance of $104 million. Our second quarter cash flow from operations increased to nearly 27 million up significantly from approximately 18 million in the prior quarter.

Given our strong financial position, we are aggressively reinvesting in our business. R&D activates have resulted in the significant number of new products introductions that has significantly expanded our sales addressable market to include high growth opportunities in digital televisions, display backlight drivers, 3G and 4G communication network, computing and automotive, the named other few. We also remain focused on enhancing shareholder value and we announced in the press release this afternoon, we maintain our quarterly $0.035 cent per share dividend and continue to by back stocks through stock repurchases which more than offset dilution of stock option purchases.

With that let's now move on to closer look at Micrel second quarter financial details. Revenue in quarter totaled 73.9 million compared to 67.2 million in first quarter of 2010 and 51.8 million in the year ago period. To reiterate, the 10% sequential growth in the quarter was slightly below expectations primarily due to delinquencies within our supply chain had delayed some of our product shipments in the quarter, compared to the same period last year, revenues were higher by 22.1 million or 42.7% due to over -- high overall demands from customers in all geographies and end market as a result and the global recovery from the recent world wide economic slow down.

Standard product sale that counted from 97% of total second quarter revenues with custom and foundry sales comprising 3%. The second quarter sales makes by product there was; analog 62%, high bandwidth 18%, Ethernet 19% and foundry 1%.

OEM turns filled for the quarter was in the low 40s. Micrel sales remain widely diversified with our top 10 direct customers counting for 28% of sales in the most recent quarter compared to 22% of sales in the prior quarter.

Our second quarter revenue by end-market was as follows; Wireline communication 32% compared to 30% in the prior quarter, wireless hand set 11% compared to 13% in the first quarter of 2010 and computing 16% compared to 14% in the first quarter and industrial 37% compared to 40% in the previous quarter, military and other 4% compared to 3% in the first quarter.

Sales by region were as follows, North America 28% compared to 29% from the first quarter of 2010, Asia 60% compared to 58% last quarter and finally Europe 12% compared to 13% in the first quarter.

Second quarter gross margin was 57.8% up from 55.4% in the prior quarter. This equates to approximately 28 basis points of improved gross margin for $1 million of incremental revenue which is in line with our historical bench mark of 25 basis points improvement per million of incremental revenue. It is important to note that this is an approximation and product mix can influence the incremental margin improvements.

Gross margin benefited from better factory capacity utilization and cost improvements with an increased revenue levels to cover fixed manufacturing cost. Our fabrication facility utilization rate in the second quarter jumped to the mid 60% range from the mid 50% range last quarter as the result of the higher revenue level in the current quarter.

Moving on to operating expenses, R&D spending increased slightly on a sequential quarter basis to 11.5 million or 15.6% of second quarter revenues from 11.4% or 16.9% of first quarter 2010 revenues. We continue to release to the market a significant number of new high performance products which we believe will drive customer demand for the company in the future.

During the second quarter the Ethernet product line introduced to KSC 8051, 8031 and 8021 family of ultra low power small packing single core 2100 physical layer transceivers. This family cuts in half the power consumption compared to prior generation, offers higher performance and an extended features set all in very compact package option.

Energy efficiency in compliance to standards such as energy becoming paramod in the digital home making area micro of new devices the key enabler for pervasive adoption of IP connectivity in devices such s digital TVs set-top boxes and media players. A low emission and high reliability and quality also makes the devices suitable for connectivity application in the fast growing industrial automation and automotive markets.

In high bandwidth product line we release fix new product which include the three devices from our new high performance clock work family. The first device is an ultra low faced noise clock sensitizer which four LVC MLS outputs designed for high density gigabit Ethernet enterprise switches. The other two clock work devices are high performance clock generators which fix differential LEPECL or LVDS outputs taken out with very low generated frequencies optimized for high speed network application such as 10 gigabit Ethernet for enterprise switches and servers as well SDH for metro and long hall application.

We also released our first 10 gigabit transceiver with programmable equalization suited for high speed block end find and data center cable application. In our prior to optical P&D product family we added the industries fastest best limiting post amplifier for GPON and GEPON very demanding OLT applications.

Continuing expansion with new product releases, the analog group announced it release 16 high performance product. These new product continue Micrel SAM expansions imitative, leveraging our technology into new applications in market. In the high voltage telecom and industrial marketplace, Micrel is please it leveraged the advantages of the hyper speed control architecture and introduce three new high voltage DC to DC controllers.

Micrel Hyper speed control minimizes the component size of the design and brings a huge simplification in cost advantage to these higher voltage design which has traditionally only been seen in lower voltage application.

In the industrial lighting space, Micrel released the worlds smallest high powered high brightness white LED driver capable of addressing the most demanding of lighting applications in the smallest space. This continuous Micrel portion to this new market with innovative and value added solution.

High lights for the mobile division include the smallest 1.5 FLUX converter with the inductor of fully integrated onboard giving mobile customers an unprecedented design size and ease of use and advantage. Continuing the mobile market Micrel released two new light LED drivers for back lighting supplies that both increases battery life by up to 30% and saves the customer valuable board space.

Moving down the income statement second quarter SG&A spending was 12.1 million or 16% of revenue up from 10.9 million or 16.2 % revenues in the first quarter of 2010. The increase was due primary to increase sales expenses on higher revenues, higher marketing expense related to new heights an increased allocation for profit sharing.

Second quarter operating income jumped to 19.2 million or 25.8% revenues this compares to operating income of 14.9 million or 22.2% of revenues in the first quarter of 2010 and 6.3 million or 11.9% of sales in the year ago period. Second quarter other income net was 0.1 million. The effective tax rate was 35.6% in the second quarter similar to the first quarter.

Second quarter GAAP net income was 12.4 million $0.20 for basic and diluted share. This compares with first quarter 2010 GAAP net income 9.7 million or $0.16 for basic undiluted share and GAAP net income of 3.9 million or $0.06 per basic and diluted share in the year ago period.

Turning to the balance sheet our liquidity position remains very strong. Cash and short term investments were a 104.2 million at the end of the second quarter up 20.6 million from the prior quarter. Second quarter cash flows from operations were 26.8 million. In 2009 we entered into a $20 million unsecured credit facility with a Bank of US consisting of $15 million term loan facility and a $5 million line of credit for working capital needs.

As of the end of the second quarter the balance on the term loan was 7.1 million down from a balance of 9.3 million at the end of last quarter where as the credit facility remains un drawn.

Capital expenditure totaled 3 million in second quarter compared to 1.1 million in first quarter of 2010 and 2.1 million in the year ago period as the result putting on more backend test capacity.

During the second quarter, the company also paid dividends to shareholders totaling $2.2 million or $3.5 per share. Accounts receivable balances increased on a sequential basis by 10.9 million in second quarter to 43.8 million primarily due to higher revenue levels in the current quarter and timing of customer payments.

Day sales outstanding were 54 days at the end of second quarter compared to 44 days at the end of the first quarter of 2010. The increase in DSO was due to primarily to a built up and distributable inventory without received corresponding collection. The DSO impact from this channel was 7 days.

Net inventory decreased slightly by 0.3 million during the second quarter to 33.6 million reflecting solid execution in controlling inventories. Second quarter days of inventory of 98 days continued to improve in lowest level in five years reflecting tight manufacturing control on higher sales quarter. At recruiting distributors was up 8.4 million from the prior quarter and total weeks of inventory in all distribution channel from 13 weeks to 16 weeks.

During the previous several quarter channel immaturities were raw but this increase in second quarter now has channeled approaching on the level and is not of the line giving the demand second quarter depreciation stock paid compensation of 3.1 3.3 million unchanged from prior quarter imitated in the press release the company’s board of directors as authorized the quarterly 3.5% of shares to be repaid on August 25, 2010 to share holders of record as of August 11, 2010.

In order to help the better understand the dynamic industry Micrel has always provided detailed industry economic conditions and outwork we want to remind to that the information is not specific to the company is a that we once again provide industries beyond outwork in our view industry will do better in normal seasonality in third quarter because of two factors channel introduces well control based on the assumption that revenue will grow at least for the third quarter of 2010 your continuing to re-punish their inventories.

We are aware of a number of companies that have scrambled the time alternate components suppliers as increased demand on semi-conductor companies caused shortages almost across the board. Distribution channel inventory returns were exceptionally high due to the low inventory situation in the entire channel. As we just noted channel inventories are now approaching normal levels.

The second factor is as world economy are still doing okay. This been said, the most recent forecast indicated a slowdown in the U.S. economy in early 2011 where GDP growth modulating from the lowest 3% range to approximately 3.7 in the first quarter of 2010.

Turning to slide number one, this is Micrel industries bolometer chart. You will know that we have made no changes to our industry outlook for the balance of 2010. Now lets look at chart number two, which is our semi-conductor industry cycle chart. You will know from the chart that we are reaching the long term trend line on unit 12 and therefore we believe the outlook for fourth quarter of 2010 and for entire year 2011 will fall seasonality. We believe that fourth quarter will be better than flat and maybe down.

We expect the first quarter of 2011 to slightly down followed by normal season recovery in the second quarter. We originally forecasted growth for 2011 to be 11% for potential slowdown in United States economy to 2.7% GDP we have revised our outlook to be in a range of 8% to 11% growth for 2011.

This is important to note that the overall world wide demand for semi-conductors will continue to long term trend of 11% presuming the ASP remain relatively constant. We know that there has been some concern of double reception in United States and while this is possible we do not believe it is likely given that this is an election year and checking with our sources, we do not believe the semi-conductor industry over capacity issue is that there would be a potential for excess of inventory built.

Now lets turn to the outlook of Micrel for the third quarter of 2010. Bookings continue to remain robust with book-to-bill well above one. Our ongoing SAM expansion initiatives are expected to help steady growth moving forward. Operationally, Micrel will continue to mange expenses very closely to ensure its growth in operating income as we get leverage from our improved factory utilization.

Specifically, we expect third quarter revenues to grow on a sequential quarter basis in the range of 5% to 8%. We currently expect gross margin will be approximately 58%. We expect total operating expenses including stock compensation to be in a range of approximately 24 million to 24.5 million. Other income is projected to be about 0.1 million. We estimate that we have approximately 1.1 million of pre-tax stock compensation expense in the third quarter.

The third quarter effects to tax rate will be approximately 35.5% on a GAAP basis. Based on these afore mention projections and an anticipated fully diluted share count of 63.2 million we will believe third quarter 2010 GAAP diluted earnings per share will be approximately $0.21 to $0.23 per share.

Before turning the call over for questions, lets wrap-up the summary of key financial and operational highlights from the second quarter. First, revenues grow sequentially at a double digit rate. Second, we had another quarter solid booking for the book-to-bill ratio well above one and backlog at a 10 year high. Third, we continue to carefully manage our expenses and focus on operational executions. Gross margin increased 240 basis points sequentially. And fourth financially Micrel remains very healthy. Our short focus on working capital management resulted in improvements in several important balance sheets metrics and cash flow from operations increased to nearly 27 millions in second quarter. Operationally we have strong momentum as we work ahead in second half of 2010.

Well thank you very much. And we will now go to the question-and-answer portion of this conference call.

Question-And-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer section. (Operator instructions). Our first Bowman Torry with Stifel Nicolaus. Please go ahead.

Bowman Torry - Stifel Nicolaus

Thank you for taking my question I have a few questions let me start by asking you about this supply development feed plus can you give us any update it may have effected.

Ray Wallin

Okay. Yeah pens up, I a good question and one that’s obviously difficult to answer because of the next issue that we face draw from beginning starts of our cab and then by the time the product in the back end there for some adjust introduce some contracts and entrust issues in this no more imbalance of characteristics we need to support the product. So its in the range of $3 million to $5 million ranges affected our revenue we start to take responsibilities for that that’s not something which all did my home work thing its just something to happened we were unable to get the product out probably managing inventories a little tighter than probably we should have.

Bowman Torry - Stifel Nicolaus

I see. And is this considered to be pushed out and is it including in your guidance for 3Q?

Ray Wallin

Some of it is but its hard to say because we don’t know how much of that product was openly stored by another competitor so we not like to put a number on that because again we are not tackling very much of that into our Q3 guidance at this point we more in another few weeks but don’t have an answer for you right now because we are trying to quantify and especially it’s a large distribution business. We need to get back to our distributors and have them validate the bookings on their customers before we can determine exactly how much of that product is still available for us to shift.

Certainly some of it I am not going to deny, there is a good portion of it. But to tell you how much I don’t know.

Bowman Torry - Stifel Nicolaus

Okay, thank you for the information. Since we are on the positive guidance the 5% to 8% appears to be above your average for the quarter. So I mean would you say that it is some of the above seasonal?

Ray Wallin

Yeah, certainly its above seasonal. We expect that Q3 will be above seasonal for the reasons we stated. We are approached the trend line and we believe that in Q4 and Q1 is going to be more seasonal normal. However we hope to mitigate that some degree because we do have our co SAM expansion going on and we do hope been seasonal for our business.

Bowman Torry - Stifel Nicolaus

For my last question I would like to just ask on how would you mention here with the SAM extension. I was wondering we can add any details on what do you think the realizable revenue opportunities are with your SAM expansion and what sort of high end range are we looking at?

Andy Cowell

This is Andrew Cowell, Vice President of Analog Marketing. Let me answer that by going over some of the key areas we don’t have expansions the expansions in multiple areas and their starting to kicking nail and will be in full force in mid 2011. Some of the key areas we have got is in the computing area we have got that is the whole up state drive that’s in revenue now. But in much bigger revenue one we moved into 2011 as I mark supplies access this year. We have got design in servers that kick in Q3 this quarter and then start kicking in Q4 and Q1 next year.

We are already seeing in self migration to higher end products from world that just helps higher end CCDC conversion scaled drivers and starting to kick. In the television with the E-connect gross and also management gross and I would stop talking in Q4 next year and then we have our own expansion and primitives with all E-connect products that is ramping outside that gross is probably going to be over half of our growth for next year. And our target is to maintain a 30% revenue gross for the company that’s our target.

But I think we are the front edge of SAM expansion right now and we all see and lot of growing your seeing is helps the mix changes a little bit on our supply chain and we just have to wrap that up when we can hatch low income rate in Q1 so that’s rights a lot of it from the factories itself.

Bowman Torry - Stifel Nicolaus

Thank you very much for the detail explanation and congratulations on great outlook. Thank you for taking my question.

Ray Wallin

Thank you, Allen.

Operator

Our next question is from the line of Doug Freedman with Gleacher & Company. Please go ahead.

Doug Freedman - Gleacher & Company

Hi guys thank you for taking my question can you talk little about the fact that you think distributors have returned or are returning into normal am a little surprised that you that you weren’t able to ship what you think was been demanded by you why?

Ray Wallin

We had a we did have a scaled out rate of the replenishment rate for the last couple of quarters so as we started this quarter to replenish some of those the comment regarding returning to normal is that they are returning to be more in line with levels that support the sales out objective so there’s staring replenish their back to what is required to drive the revenue growth that we are expecting there still our supply concerns in the market we have some of ourselves as well in terms of shipping everything that they need. But that is starting -- we are starting to catch that. And that reflects in the book-to-bills, like lets say, few quarters ago maybe you're we have 1.6 and then it goes to 1.4, 1.3, 1.1 and lets say by September or maybe October you're down back to 1, you have seen that because revenues are increasing at the same time.

So ultimately, you're going to catch their demand, they are going to have now their supply in line with their revenue outlook. And then ultimately they are just going to reduce your bookings to match what your outflow is. So, because we have a water polo chart that actually shows your immaturity levels raw to the demand and you are just become to catch up now

Doug Freedman - Gleacher & Company

We get that in another way if you were to figure shipment goal distributors and tourist have reduced even more

Ray Wallin

I just want to mix because we next and you can always and say we should have built this we should have built that and that’s true I mean we have been doing that for the last three weeks letting run a quarter back our self as we got our PLS numbers and talk to our distributors we frankly did not shift them the product in mix is what we did is we shift against the back log but not in a uniform way where we keep him nick in line does that make sense to the product what we have and we just didn’t we have to 12 weeks because it takes 12 weeks to build a product and so we have to begin actually building products before we actually get their demand and so we just built out of mix and that is why we have the supply issue is that when the distributors started getting on mix in line with their demand we had to go all the way back to the final line

Doug Freedman - Gleacher & Company

Can you talk about what your company might specific doing what they were in the quarter and what you are expecting to do

Ray Wallin

At this point they were quietly up from

Andy Cowell

The net issue don’t get carried away

Doug Freedman - Gleacher & Company

I recognize this next can you talk to the had several pretty good quarter as far as hiring a senior executive announcements is there anybody there making specific note or commentary like to offer as far as if that’s having any impact on your goals?

Ray Wallin

No I mean these quarters will go as far as our gross outlook past performances what do you mean

Doug Freedman - Gleacher & Company

No your ability is actually.

Ray Wallin

Well certainly would request running work myself we are definitely getting deep focus now on this distribution because that’s his expertise his is distribution and so he’s going cold with our distributors and we are getting a lot of traction because of his connection his knowledge about that sector and of course we seeing a tremendous improvement in our revenue in ASIA and so as the consequences are bad we are getting into lot of key counts a lot new markets we have been in before and that’s really beginning to drive our prior revenue so we are very exited about our penetrations in Asia because that’s the real market place and it also has the most price competition too so that the fact we can execute so well on that still maintain our margins we think to compete in a very difficult market anything else Chris

Ray Zinn

Yeah I would just pack it up with being on extending Mircal’s work in Asia and during the last couple of quarters we have opened a Micral Asia package head quarters in Hong Kong we have installed the director of Asia pack sales of Micral been with the company quite sometime and is a seasoned industry we have made some changes in territories in terms of territories management leadership. And certainly we have handed resources throughout that geography focusing on high growth markets and driving our expansion into costumer based that we have not participated in the couple of years ago even last year so that’s really providing a great return for us in Asia and we expect that to continue in the quarters moving forward.

And we have the marketing group two with the term control of our marketing group from analog in right end and building that up from strategic application and definition and product definition is very improved in tremendous way so Andy’s work eventually broke that entire marketing group and of course JC the that’s why Ethernet has begin to grow because we are getting some traditional from his market expertise and non economical over the high for our to quite nicely and we are at the leading edge of the talking to some kind of expansion is through analog and analog it may because buyers 7% of our product is broken house because again we just wore out mix on our when you have to re tap back into the 12 weeks we just didn’t quite make it if we could extend the quarter a couple of weeks we might be able to do better but any way it’s a value my that’s what happened.

Doug Freedman - Gleacher & Company

Thanks for the detail.

Operator

Our next question is from the line Sumith Danda with Bank of America/Merrill Lynch. Please go ahead.

Sumith Danda - Bank of America/Merrill Lynch

Hi guys, couple of questions follow-up on the supply chain the way you cant write that as about $3 million to $5 million and you thought you might have to shift half of it its call it couple of million dollars. But when I look at you I would look into third quarter most likely lowered and anticipated days seems like it’s a little below seasonal the is the time require same higher lower into the third quarter of the dynamics between we need to be aware of?

Ray Zinn

The trends of quite normal and I think it goes back to the POS point of sale the and after they grow questions for us really how well are distributors going to do. And so some of this they were referring to the 3 million to 5 million is in distribution and remember I mentioned that it depends upon we will know in another few weeks because we need to verify with our distributors how about those bookings with customers and are those or that is just going to immature we don’t know the answer that and so being cautious we just don’t want to verified at we didn’t want to put out a number that we thought might be a jeopardy. So it just that being a little cautious and just making sure that and our distributors just don’t have enough information for us they help us understand what the mix issues are going to be and how is it going to work on quarters.

So we have a really fatted in much of all of that 3 or 5 into Q2 number or Q3 number. And so that does happen and of course you will see more of higher ender so or guidance so you didn’t get a reasonable range of by the percent. So again it depends on how much of that stuff is available you note we are getting for 10 years. So our revenues levels are higher then we see it. So we going to get ourselves readjusted to for these higher revenue levels and just to make sure we have the manufacturing infrastructure to support the demand and certainly we didn’t have it in Q2.

Ray Wallin

Hey Sumith this is Ray Wallin, is irreverent financial rates there are thing we can control here might we can't control cannels as their component companion to our product or we weather not delivering their components and the fact that Micral shifted as well. So other factors considering ability to make up to the delinquency.

Ray Zinn

I don’t want to under empathizes the fact that we are revenue levels and we have been at that for 10 years. So we have get ourselves back in not getting carried away doing too much and too much headcount. So we are high introducing the managing is so that we don’t ourselves.

Sumith Danda - Bank of America/Merrill Lynch

Just to be clear when you said times requirement are consistent did you mean -- can you be specific was it low 40s I think you said in Q2 what are you anticipating just the mid-point?

Ray Zinn

Terms are going to be lot same as they were in Q2.

Sumith Danda - Bank of America/Merrill Lynch

Okay. And that includes any make up in delinquency if you shift --

Ray Zinn

Which part of range are you talking about you talking about low end?

Sumith Danda - Bank of America/Merrill Lynch

The mid point of the range.

Ray Zinn

The mid point is a there maybe a little bit I mean maybe 0.5 million something like that.

Sumith Danda - Bank of America/Merrill Lynch

Okay. The other question I wanted to ask you is in terms of your growth line mark the numbers aren’t back into its seems to be running a little from what we got from other companies that’s why there are supporting seasons your computing business seems to be very strong and doesn’t seems like the comp in Q1 was particularly easy. And your industrial business is just up slightly which is some of the opposite of most everybody else is talking about anything you could offer up for help explain this discrepancy?

Andy Cowell

Hi Sumith this is Andy Cowell. The computing was up primarily driven by high demand for U.S. switches and also the front end of our HSD product so call it state drive product kicking in so when you see in our percentages by market I wouldn’t draw too many conclusions because what your seeing is one mix issue due to our capacity constrain and two we are on the front edge of and one of the first one hit in the computing segment. So you will see computing down a little bit you mentioned industrial.

Industrial was actually was damn slightly so Q2 to 37% from Q1 of 40% a lot of that is mix. I wouldn’t go too much into I wouldn’t draw too many conclusions when you turned mike managed exact percentages because you will have issues that we can share and inside the front edge of the expansion if you dumped it 3 million to 5 million back into Q2 industrial side then I think you will see more clear picture.

Sumith Danda - Bank of America/Merrill Lynch

Okay. So the delinquency then primarily in the industrial segment.

Andy Cowell

Exactly.

Sumith Danda - Bank of America/Merrill Lynch

Okay. That does helps, thanks. Last question for me any particular end markets that you anticipate driving growth into Q3?

Ray Wallin

Well we will move this year, anywhere.

Andy Cowell

We have got a couple of nice things happening to Q3 we have got our cell phone we have starting to see in the cell phones starting to see high end products start to kick in there much higher ISP and higher margin and they designed into high volume. So they starting to kick in. We're seeing robustness in networking, we're seeing robustness in the TV. But a lot of ways the who we kept track on a new socket the new business which over whelms the market trend if that particular market was going 5% or declining by 5% we had such big SAM expansions in December felt areas that help growing and the other thing to note is our SAM expansion has been across whole market from that’s computing industrial and across all the units of the company. And we are seeing a lot of kicking on that front edge well I think we will see gross across whole market with this specific one I talked about and I think the particular one is going to be forward is what we stop to see the computing none above the.

Ray Wallin

Just some color what Andy said. If we look at the non seasonal just a we talk about being above seasonal I would say that its more an industrial left back in the distribution so we going to see little apparent then normal in industrial because of just what we talked about earlier about catching up and getting our mixed that demands from our distributors presuming that we still start shipping the other is going to be just the normal seasonal for Q3 and Q4 which is the consumer built up just that counts the normal seasonality you see so we have that and then we have the added because of just getting back on track with the industrial does that accept to you.

Sumith Danda - Bank of America/Merrill Lynch

Yeah. Thank you so much.

Ray Wallin

You're welcome.

Operator

(Operation Instructions ). Our next question is from the line of Christopher Longiaru with Sidoti and Company. Please go ahead.

Christopher Longiaru - Sidoti & Company

Hey guys, how are you?

Ray Wallin

Fine Chris, thank you.

Christopher Longiaru - Sidoti & Company

So I major question is you have this record bag which really goes well for I mean the upcoming quarter can you talk a little bit of on and off couple calls but I’m going to apologies but we are the back log strongest areas back log is pressing you in just add a little more color to that?

Chris Dingley

The strength in the backlog -- this is Chris Dingley. The strength of our back log is coming out of our fastest geography which is Asia. So as we continue to penetrate the computing of costumers In that geography continue to expand our SAM in wireless area continue to expand in the consumer area if you personally buy the digital TV market that’s where our expansion has occurred and that’s where we will continue to see the revenue expansion as well.

Christopher Longiaru - Sidoti & Company

Now with the problem that you experienced this quarter and I guess you said its put dominantly in the industrial part of business/

Chris Dingley

Right.

Christopher Longiaru - Sidoti & Company

Is there any thing in that backlog that it just harder that problem is that backlog is small visibility into that backlog or its just really its just simple just not having enough products on distributor shows?

Chris Dingley

It is both of those. We didn’t have another product and also the visibility because again our distributors refilling their pipe line.

Christopher Longiaru - Sidoti & Company

Right.

Chris Dingley

And so you know there’s a visibility issue can't compete on how much that’s going to deal through and how much is the pipe line. So the reason we were conservative on our guidance’s that we need to see where’s the stocks going to be because our distributors are getting the products and they going to get even more products because we going to catch up. So we are being a little conservative we did this in Q2 and we don’t intend to mess it in Q3.

We just are hedging ourselves a little bit then actually lined to get a look at distributors and that’s the big key the back log is a backlog so that’s easy in returns is we compute the normal turns. So there’s no respiring act because we have trench levels we can rely up. So the only thing a know POS outlook is really you going to be our and as been the I mean that thing is 5% to 8% variance so to speak is in that sales root.

Christopher Longiaru - Sidoti & Company

Got you. That’s all for now, congratulations on the good guidance and keeping the cost under control.

Chris Dingley

Well thank you, Chris.

Christopher Longiaru - Sidoti & Company

Thank you guys.

Operator

(Operation Instructions). Management, I show there are no further questions at this time. Please continue with any closing remarks.

Ray Wallin

Well thank you Damien and we do appreciate you all listening on our conference call. In all it was a mix bag, we are very happy with our execution on our expenses and fab utilization that resulted in us having a good -- better than expected gross margin. And also the fact that we are continuing to see good design wins in our growth its still looking intact. So we are optimistic we think Q3 will be more better this seasonal. And so we look forward to talking to you in October. So thanks again for joining us.

Operator

Ladies and gentlemen, if you like to listen to a replay of today's conference please dial 1800-406-7032 or 303-590-3030 and answering the access code 4329561 followed by the pound key. The replay will be available until July 29, 2010. This conclude the Micrel Incorporated second quarter 2010 results conference call. ACC would like to thank you for your participation. You may now disconnect.

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Source: Micrel, Incorporated Q2 2010 Earnings Call Transcript
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